Siegfried Holding AG (SFZN) Earnings Call Transcript & Summary

Dear all, on behalf of the Siegfried team, I would like to welcome you on this very special and remarkable day in the 150 years history of Siegfried. With me in the room is Wolfgang Wienand, our CEO; and Reto Suter, our CFO. We will start with a presentation about yesterday's announcement and then followed by a Q&A session. [Operator Instructions] I would like to inform you that this call will be recorded. Without ado, I would like to hand over to Wolfgang.

Yes. Thank you very much, Peter, and also warm welcome from my side. And actually, probably a great pleasure for the whole team here in the room to present to you what we have been working on over the last month and eventually have been able to successfully execute yesterday evening, which is that we, Siegfried, acquired a 95% majority stake in DiNAMIQS. We will talk about that company to establish a best-in-class development and manufacturing organization for gene therapies. Before we actually dive into further details, please read the safe harbor statement carefully. Take note with regard to forward-looking statements made during this session, either by Peter, Reto or myself. So DiNAMIQS, a Siegfried company. Besides this being a [ cool low thing ], telling a lot of what we have acquired and of course, what we want to do with the asset, which is about DNA, it's about remaining dynamic. We decided not to, from the very start, make that Siegfried company, also in terms of branding for a number of reasons, which we will be happy to discuss with you later in the presentation. For those of you maybe being new to us, a brief look back at our corporate strategy evolve, which we discussed intensively and decided in 2017. And from then onwards, step-by-step, are executing along our ambitions and along our plans. So, I'm happy to repeat how we look at the landscape and what you can expect from us here at Siegfried in terms of further developing our company and making use of as many as possible growth opportunities, be it through organic investments into what we are, who we are today or through M&A, to add what we are and who we are today or even reach out further into new areas. 3 segments. In a certain way, even modular, which is something we like a lot about our strategy because we are not depending on the logical sequence of this. That needs to come first. Otherwise, the second step doesn't make sense. So a modular strategy. First of all, grow our existing core, so making us stronger where we are already strong today. We are one of the leading CDMOs, and we are the largest, the leading small molecule CDMO in the space of Drug Substances and Drug Products. We are masters of complex chemistry, very strong in oral, inhalation, solid dosage forms, sterile liquid dosage forms. And we are one of the very few companies in our space being able to credibly offer integrated Drug Substances and Drug Product services. While it's good to be where we are, we would be ready anytime to actually acquire assuming that there is an attractive asset becoming available. Otherwise, we continue to invest organically, as we are just, I'm right now doing in Minden, where we spent CHF100 million and in Evionnaz where we just had groundbreaking, I think, 2 weeks ago, into a new center of excellence, world-class process development capabilities on one of our flagship sites in Valais, where we spent CHF25 million. Then there's the second bucket, which I call adding adjacencies, which is probably more about technologies and strengthening our current offering and filling gaps, of which they are actually not so many left. But still, there are attractive opportunities also in that area, which is about formulation of an aseptic finish of large molecules, which is essentially implemented. And I will refer to that later in the presentation again. So, we might even be able to take that off the list because we did it already. Particle technology is about lyophilization, spray drying, micronization, very interesting for us, which is why we invested into micronization, but would be ready to acquire technologies in that space as well. In fact, product delivery systems has a kind of a hook to actually feed our large commercial capacities in the Drug Product areas and also antibody-drug conjugates. Last area, our ambition to actually reach out and push our company forward even beyond of where we are strong already into new areas where the CDMO model will be attractive in the future and would offer opportunities for us at Siegfried and our shareholders as well. Antibodies, which we would probably, in the meantime, call more of the conventional biologic space, Drug Substances in this case because Drug Product, we already master. Then cell and gene therapy and viral vectors, which is highlighted here for obvious reasons. DiNAMIQS is actually the entry into this new area, and we will talk about that in a minute. So, our takeaway here is based on our modular corporate strategy evolve. You can expect from us to be able to continue to drive profitable growth through organic investments, or like in this case, through M&A and DiNAMIQS being the perfect fit to the strategy that we are presenting to you since now a number of years and step-by-step checking [indiscernible]. A brief look at the playing field, which we have entered yesterday evening. But let's start with the overall pharmaceutical market, which in itself is a very attractive area, and it's a privilege to run a company in that space because it provides -- if you do things right, it provides numerous opportunities to create value. So 8% year-on-year growth. At least if we look at the timeframe, as shown here on that slide, 2020 through 2028, and still dominated by the small molecule space, which still is the lion's share of the pharmaceutical market. Very strong in terms of new drug approvals, 60% to 70% over the last 5 years or so and also a very rich pipeline going forward with an overall very robust and attractive growth dynamic of slightly below 6%, which in terms of absolute additional business becoming available every year, obviously, is a great place to be, and we are happy, very happy to be one of the leaders in that very space. Then there is the conventional biotech 1.0, we call it, biologics space with proteins, monoclonal antibodies, growing at slightly below 9%. Now in a very important part, obviously, in the space as well, which is why we decided that we wanted to enter it and invested into it, and have been able to successfully capture opportunities in the aseptic finished Drug Product space over the past years. And I will briefly reflect upon that later on as well. Then there's this dark blue, starting small but getting big part of the pharmaceutical landscape, which is biotech 2.0, new biologic modalities, the cell and gene space, growing from a low base, obviously, at 40% to 50% CAGR over here. And that is essentially the growth dynamic, which we entered with the recent acquisition. And let's have a deeper look in that very segment of the market. And in our case, DiNAMIQS, at least as of today, is about adeno-associated viral vectors AAV. And AAV CDMO services already today are substantial in terms of market size. And they are, as the underlying market, of course as well, forecasted to show very healthy growth rates based on a high number of clinical candidates in the pipeline using AAV. But a few figures here. The viral vector CDMO market in million US dollars, I mean, grew by, I think, should be 70% between 2022 to 2023 to more than $700 million, and is expected to grow at almost 20% CAGR over the next years to become a very substantial market in itself above $4 billion. And within that market, which, of course, applies different technologies when it comes to how the viral vector or even just the vector, which you need in cell and gene therapies is constructed within that market, the AAV technology has the lion's share with almost 30%, 40%. Viral vector manufacturing, which is always a second question, which is about, okay, important technology, attractive market growth rates. But who's doing it? I mean who is developing and who is manufacturing at the end? So the question, how much is outsourced and how much is kept inside with the pharmaceutical, but innovative pharmaceutical companies. Here, you can see a survey and in the industry, which says that more than 60% in 2021. So 2 years ago, has been outsourced to CDMOs to experts since yesterday like us. And this ratio is expected to grow over the next years to 68% and further. Reason being that if you look at the pipeline, I mean, that is the classical playing field for biotech startups, right? Of course, innovation is coming from big pharma as well. But I mean, also here, the small companies are more innovative, are creating more needs, they're creating more candidates and they, by nature, looking at their funding and where they want to invest it. They don't want to invest into brick-and-mortar. They need partners like us to actually develop superior processes and eventually provide the material that they then need to actually prove efficacy of their modalities in clinical trials. So a very healthy trend, kind of similar to what we have seen in the small molecule space over the last 25 years in the biologic space over the last probably 10 years or 15 years. So strategically, something where we thought, which is why we put it on our strategic agenda, this would be a great area for us as Siegfried to play in. Viral vectors, there are different technologies. I think that's an important insight, and we need to be aware of that and we will talk about that later as well. AAV, the technology that we acquired yesterday evening is dominating. Currently, the pipeline of gene therapy trials, with approximately 42% of all viral vector technologies used in clinical development. So, a healthy space, growing, very attractive growth dynamics from which we, over the next years, will be able to benefit based on what we decided to do yesterday. DiNAMIQS, briefly on the asset itself. It is -- I will talk about location later, a Swiss biotech company in the Bio-Technopark at Zurich-Schlieren. A great ecosystem. But let's start with, let's say, the technical setup. DiNAMIQS has been founded and built out as a one-stop shop for preclinical to clinical services, development services, analytical development services and also small-scale manufacturing services with cutting-edge scientific expertise and was actually great to do due diligence. And I participated myself being a scientist at least originally myself, chemist, PhD. And talking to those people was really a pleasure. Because on any of the areas that we will briefly go through here on that slide, you could see, I mean, of course, different characters, different styles, but people who really love what they do and not only love what they do, but are truly great scientists. But let's briefly go through it. Molecular biology. Of course, that's the start of all. I mean, understanding the issue, which in the case of cell and gene therapies is genetically rooted. And the innovation of the pharmaceutical companies with which they then come to us, their most precious asset is understanding the root cause of a certain genetic disease. And I mean, providing genetic information, which is capable of curing it. But then the issue starts, which is about -- I mean, how to manufacture and how to bring that genetic information into the human body, which is done through vectors, viral vectors. Asset optimization, very important because that is about yield and about noise of your product, impurities every way. And it's about manufacturing. I mean, how efficient are you? And what they do there so far is for large reactors in the lab, 250-liter high-end pilot scale capacity, and then building out the downstream processing up to 500 liters, which is what we at Siegfried now will establish in [indiscernible]. The clinical Phase 1 to 3 is what they actually started to endeavor into and what we will then high speed with the full power of Siegfried further execute, which is building a high-end commercial manufacturing, GMP compliant for upstream processing, which is about, I mean, creating the biological modality and the downstream processing, which is kind of fishing it out, out of the mixture of the fermentation media and eventually -- and that is a great thing also strategically supporting our ambition to create integrated supply. Eventually, this is aseptically filled into vials, which is something we can do already today on our manufacturing sites in Hameln and in Irvine, California. All that is accompanied by strong analytical development capabilities because -- I mean, it's hard to describe small molecules. But compared to that, small molecules are a piece of cake. And understanding what actually is the product, how it looks like and specifying it is a must win battle in that space. And we have great people at DiNAMIQS who love doing that. And we, together with that strong team will now build out commercial capacities and make the whole range of services from preclinical to clinical to commercial manufacturing available to the whole pharmaceutical universe. Now over to Reto because besides science, we, of course, spend a lot of time on how to structure the deal in the best possible way, so that first of all, we have reasonable entry costs. Second of all, we have a blind interest with the seller and also make it operational, doable for us. But over to Reto as he guides us through our thinking.

Yes. No, absolutely. Very happy to do that. So what you see here is some structural elements around the transaction that we signed and closed yesterday. To structure chart basically, the one to the left describes the situation prior to the transaction. So yesterday, the one to the right describes the situation after the transaction, so the situation as of today as we speak. The transaction scope. So the parameter of the transaction was this company, DiNAMIQS. You see it in the [indiscernible], which in the previous structure was a fully owned subsidiary of DiNAQOR, which in itself is a therapeutic company developing its own gene therapies. In the old setup, you had DiNAMIQS receiving corporate services from DiNAQOR. And DiNAMIQS, in turn, provided development and manufacturing services to DiNAQOR in turn. And even in that structure, DiNAMIQS already serves and served third-party customers, biotech, but also large pharmaceutical customers. Now how does the structure look like as of today? Of course, Siegfried now, after the purchase of 95% of the shares is the 95% shareholders of DiNAMIQS. For the remainder, the 5%, which still is owned by DiNAQOR. There's put call options for the acquisition after 5 years following the closing. DiNAMIQS will enter into manufacturing and supply with DiNAQOR arm's length. So basically replicating the situation as before. And DiNAQOR will, for a very limited time period, continue to provide services, we call transitional services until Siegfried will take over and provide these services then on the service level agreement to DiNAQOR. And as mentioned already by Wolfgang and as also depicted on Slide 3 of the presentation, DiNAMIQS will continue to operate under the brand name DiNAMIQS.

Yes. And thanks, Reto. The reason being -- and Reto myself can briefly reflect on that. I mean, we acquired a truly strong team, cool people. Ladies and gentlemen, they actually are happy to join the Siegfried company. They, I think, like the culture. We got to know them throughout the due diligence process already quite well. But at the same time, it became clear to us. And we do have a strong entrepreneurial experience at Siegfried. But we -- I mean, a kind of a large corporate already, right? And those people, we want to give the necessary freedom so that they continue to thrive. So really push the scientific bonus forward because that is still needed in that space, and we might reflect upon that later. And at the same time, we want and will provide all the necessary support, which they need because they don't. I mean they are unable to, on their own, build a GMP facility. I mean, they are not able, on their own, to approach any customer. We are. We can go to any customer in this world. And based on our reputation, we'll have the opportunity to actually pitch any offer, any services to the whole world. And they will be able to learn a lot from us as well when it comes to how to provide strong services, how to build to us, which is why we decided to actually, for the time being, let DiNAMIQS operate largely independent with the Executive Committee reporting to myself. Of course, there is a Board as well. And by doing so, we are convinced that we will get the best of both worlds. A large, still very flexible entrepreneurial framework of Siegfried and the spirit of, let's say, a small, agile, flexible company with a small team. And that's, let's say, the structure here. And let's maybe briefly talk about the ecosystem. I mean, first of all, I mean, there are, of course, a few places, not so many, but there are a few places in the world where the boundaries of biotech are really pushed forward. Of course, the West Coast in the US, where we do have a presence with our Irvine facility, which actually targets exactly those customers with their aseptic difficult to make fill finish services. Then there's, of course, Boston. And there are some other places, probably Heidelberg, but clearly also Zurich-Schlieren. The Bio-Technopark is a prime ecosystem for biotech innovation and biotech ventures in Switzerland. And it is on the doorstep of Siegfried. It is 40 kilometers away. And based on that proximity, we will be able to actually also by close interaction and support to really let this opportunity flourish, which would have been much more difficult for us as a first step into that space if that acquisition opportunity would have been 5,000 kilometers away. So I mean, a brief look on the building here. I mean these, some of you might know those high rises, which are technical buildings with lab spaces, many other biotech startups are working there. And we at Siegfried will own a few floors or rent a few floors in this building and I think in another building for the lab space and further build out commercial manufacturing in this area. I mean what will we specifically bring to DiNAMIQS corporate functions? Obviously, things like ERP systems, structure and quality, but not overwhelming, not killing the spirit, of course. Quality, GMP capabilities, very important. Engineering, something where actually our teams are great at. And again, go-to-market, shaping the offering based on our CDMO experience, based on our reputation as one of the leading CDMOs in the world. We will, together with the team kick doors of our pharma customers and offer this additional service. So talking about what we did yesterday. I think it's important to explain it to you. And I very much hope that we have been able to. But of course, there is the question, okay, great. And this is a facility where we will create commercial capacities and those capacities mid- to long term, probably offer a revenue potential for us at Siegfried of a mid to probably even high double-digit million Swiss franc annual revenue amount. But can that be it? And the answer here is probably not. And if the things evolve, as we expect them to evolve in terms of overall market, market demand, CDMO technology, this is for us only the first step into that space. And we are ready, mentally, and also looking at the funds available to further build out DiNAMIQS as our nucleus for further growth. I would like to briefly reflect upon how we enter the space of biologics over the past 5 [Technical Difficulty]. On the left-hand side, in blue, SM, small molecules; LMS, large molecules; DS, Drug Substances; DP, Drug Products. We have been strong after, I mean, execution of our transform strategy and also the first time and evolved. We have built a company which has leading capabilities and capacities in the small molecule space, but had technologies, but not really fully exploited it in the space of aseptic fill finish of large molecules, biologics, which is why we said, look, that organic step we want to take, we want to invest into additional equipment and into the expertise of our people. It was a conscious decision in 2017, which actually made us strong in the field of aseptic fill finishing of biologics and put us, by the way, into the position [Technical Difficulty] challenges Novavax and actually others. Put in front of us, when they asked us if we would be able to, within 8 months, ramp up capacities and contribute to the fight against the coronavirus pandemic and manufacture commercial volumes of both vaccines. And we successfully did. So really created a strong footprint in the biologics space already in Drug Products. Now with DiNAMIQS and our attention and ability to build out this expertise and also the capacity we have made this step, in line with our strategy into the large molecule space, which we have shown here as a light blue. What does it mean being a core? And what do I mean when I say we will scale it out and, obviously, [Technical Difficulty] markets developed. Scaling out can mean, we take what we do there, what we have learned there, what we have established there commercially and add additional capacity. Because Schlieren clearly is a great place when it comes to innovation and doing the first steps in terms of long-term competitiveness, large-scale manufacturing. They are probably better places in terms of cost structure, and we would be ready to actually build out based on the expertise, based on the know-how, based on the customer relationships built through DiNAMIQS in Schlieren to build out capacity actually on other sites of Siegfried or on new sites and create a global footprint also in [indiscernible] going forward. We also need to keep in mind, and we briefly talked about different technologies, AAV being the most important one currently, but still having a competition between different technologies. We at DiNAMIQS will continue to also invest into cutting-edge science, which means working on other viral vectors work, for example, lentivirus, also potentially looking at mRNA. So it is really the modular optional nucleus platform for us, which we will not only commercially exploit based on AAV, but where we will continue to actually also work on technological solutions for the cell and gene space going forward. With that, I actually come to the close-out side. [Technical Difficulty]. And I mean, we, the team yesterday made another step. And we are now, together with you, talking about this step. Our mission is unchanged. Any steps that we will make strategically according to evolve is geared towards to consistently deliver profitable growth by either investing into the network or by executing value-adding M&A. And on the left-hand side, you see what we always had as an ambition, M&A in core areas and beyond. DiNAMIQS, clearly is beyond. And in our view, this approach of an initial small-scale acquisition of a highly capable technology platform later on, as just discussed, followed by flexible bolt-on investments into capabilities, technologies and capacities in line with actual market needs, provides significant value upside for us at Siegfried and for our customers and all that at reasonable entry costs. So I mean, all that, as always, ends up in the reiteration of our 2023 guidance. Siegfried expects low to mid-single-digit sales growth in local currencies, probably at the upper end, with a core EBITDA margin of 20% or higher with a positive mid-term outlook confirmed. And with that, I hand it over back to Peter. And I'm sure that you will have a number of questions. And Reto myself, of course, as always, very much looking forward and to provide the best answers possible.

Great. Thanks, Wolfgang. So, we'll now move over to the Q&A session. You can ask your question by raising your hand. I will call your name and you can unmute you mic. Please note that in this Q&A session, we will mainly focus on the announcement from yesterday and the transaction. If you have any other questions, feel free to contact us directly after that call. All right. So with that, I would like to hand over the word to Gary Steventon.

So firstly, just wanted to ask about the rationale for the deal being of this size. It's relatively small, I guess, compared to what we've seen other CDMOs do to access the viral vector space. As you mentioned, it's the first step. You did have the balance sheet for a larger deal. So, I was wondering kind of why you picked the scale of DiNAMIQS. Is it a question more of financial discipline and strategic fit, with the option for further growth in the future? You've got the clinical scale now. You're ramping that up into commercial scale and you mentioned the potential for bolt-ons. Or is it perhaps due to the greater risks that are associated with gene therapy products and moving the modality from clinical scale more into the commercial space, which has been slower than initially expected? And then the second question. Given you mentioned the increased optimism in the guidance range, I'll ask on that as well, please. Just wondering if that optimism on the top line outlook also flows through to the margin? And then linked to that, if you could just provide some additional detail on really what the drivers are of that increased optimism in performance? Is it mostly Drug Substance? Or is there some Drug Product outperformance in there, too? And then a third brief question, which is just -- you mentioned cell and gene development more focused on smaller biotechs. So really just want to ask about your views on the current weakness we're seeing in biotech funding, whether this is a concern now or how manageable do you think that is moving forward?

Yes. Thank you very much, Gary. I think, actually, for sure, 3 great questions. And let me start with the first one and start with the disclaimer. We will, of course, not comment at the strategy and the deals, which competitors actually executed. But we will rather talk about why we did, what we did. And I would think that from the difference in approach, which is a conscious difference, you might conclude what our preferences actually are. I mean, maybe starting with the shortest version. I mean, I personally would not exchange or trade this deal against any other deal made by any competitor in that space before. First statement. Second statement, it is exactly the kind of deal that we have been looking for to enter that space. And now maybe the rationale for my statement, which is, it is a young space. It's a great space. It is really going to the core of certain diseases where the pharmaceutical industry would have issues to address them otherwise. Small molecules are great. They can do great stuff, but certain diseases won't be addressable through small molecules. So in our conviction that space is here to stay, and that's great news for human and mankind I believe. Second of all, it's still a very young space. And it is young in terms of technologies applied. It is young in terms of efficiency achieved, and it is young in terms of how to pay for that. And we thought that creating a highly competent or acquiring or making accessible to us, a highly competent nucleus, which in itself doesn't mean we would exhaust our funds in the very first step already, but having the scientific expertise to really provide solutions to the space and remain flexible in terms of what, in the end, in 5 years or 10 years from now, maybe the winning technologies might be, is the right approach in that very space. So it was not lack of alternatives, it was intentionally done like that. What do I mean when I talk about, I mean, open questions in this space? I mean, I'm actually not convinced that a CHF2 million cost for a health care treatment a year is sustainable in the sense of making those treatments available to a large number of patients as possible worldwide. And it little bit reminds me of the early phase of the monoclonal antibody market developments, right, where it was extremely expensive as well. And that is then the second logical step. That is an area where technology needs to provide solutions and will provide solutions, solutions in the sense of where we'd like to use and also solutions in a sense of reducing by factors, by factors of tens, so lock factors, reducing manufacturing costs. Because otherwise, the world will have a hard time to finance these therapies. So here, the CDMO technology, science people like those at DiNAMIQS will have to provide solution to make it successful with the solution not being quite clear yet, which is why we thought let's go to the core where the solutions need to come from, and we are convinced that DiNAMIQS can be such core. The money to be spent later on as soon as we precisely know where the largest potential actually is. That money we have because we didn't spend it upfront by paying CHF1 billion or so, right? And we will then, based on that flexible nucleus step-by-step, build it out and create long-term opportunities for growth for Siegfried. So that was the answer to the first question. And I hope that this makes sense to you, Gary, and to all of you. The second question, you might -- that was about the guidance. Maybe, Reto, you would like to take that over?

Yes. Sure. No, of course, very happy to do that. And Gary, just to be very clear, we did not change the guidance. This is still the original guidance. However, in the wording, expressed more confidence that our first half results will support us for the full year, ending up at the upper end of the current guidance for revenue growth.

And for profitability as well.

And for profitability as well. I mean, you asked for the reason. Of course, almost now exactly 1/3 of the year has now passed, so 4 months are already in. And obviously, that is, as such, of course, de-risking.

Third question. I mean, my answer was too long, Gary. I forgot your third question.

Biotech funding.

Biotech funding, yes. Yes, I mean you might ask the question, why have we been able to, first of all, identify the opportunity and execute this opportunity as how I would call it reasonable entry costs. Because it's not peak time anymore, right? Probably 1 years or 2 years ago, a deal of that kind at that valuation would never have been possible. So sometimes it's about time as well. And of course, that relates to the reduction of biotech funding. But for us, in our view, that's a temporary thing. And we need time anyway to build out this nucleus. And we are sure that for additive innovations in the biotech space, there will be money available. Also today, there is money available. We have seen the customers of DiNAMIQS. And things are moving forward. And as long as you're able to provide scientific technological solutions within a comprehensive, I mean, high value, high-quality CDMO offering, there will not be a shortage of inflow of projects also at DiNAMIQS and thus, attractive assets in the biotech industry will, according to our view, always get funding. So now I think -- I hope that we checked all boxes of your questions, Gary.

Yes. That's very clear. Just given you mentioned the confidence also in profitability on the guidance, I know that the current guidance is more of a floor rather than a range. So perhaps you could just help us framing that comment, maybe with reference to 20% as the bottom of that range and the 22.2% margin that you posted for FY '22? If you can just give any directional comments there, that would be helpful.

No, again, same guidance, but more I'm optimistic so towards the upper end of that.

Yes. We want to leave it there.

Great. So the next question is from Charles Weston.

Can you hear me?

Yes.

Thanks for the presentation. I have 3 questions as well, please. First of all, can you just touch on some of the characteristics of the existing business that you've acquired specifically around [Technical Difficulty] asset value for the order book? And perhaps also just in terms of the capacity and capabilities. When you acquired the Novartis site, you said that the sites -- you said that there would be a few years before you could market that as a customer-facing CDMO. Can you start marketing dynamics capabilities from the get-go? I'll sort of leave it there for that one.